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Doomsay away, it’s still China’s century: Olive

Why China matters, even as alarms are sounding about a looming debt crisis in the People’s Republic.

Pedestrians wait for traffic to pass on a road in Beijing this week. Given the immensity of the enterprise they are shaping — one-fifth of the world’s population — the surprise isn’t the occasional setback in China’s remarkable transformation, but how well China’s economic planners are doing in guiding China to a sustainably prosperous future, writes David Olive.
(GREG BAKER / AFP/GETTY IMAGES)

More signs that this century is destined to be recalled as China’s century as much as America’s have appeared in recent weeks, even as alarms have recently been sounded about a looming debt crisis in the People’s Republic, and an alarmist but influential report this week forecasts plunging growth rates in China’s economy through to 2025.

China matters, of course, as a long-time exporter of affordable goods that have increased the standard of living, and reduced the cost of living, for hundreds of millions of North Americans and Europeans. China is also an increasingly important customer for imports. It is now the world’s biggest buyer of industrial robots, for instance. And Beijing long ago assigned to Montreal-based Bombardier Inc. the megaproject of building China’s state-of-the-art intercity commuter rail network.

China has also rapidly created industries that generate vast amounts of electric power and manufacture cars and trucks, jetliners and advanced environmental-protection goods, gaining an early lead on the U.S. in, for instance, solar panels.

“China shouldn’t be underestimated,” economics columnist John Cassidy wrote this week in The New Yorker. “Whatever one thinks of (China’s) authoritarian state-capitalism model, its success in building industries from scratch cannot be denied.”

Most important, China matters because the semicapitalist reforms it dared experiment with, beginning roughly 30 years ago, have lifted hundreds of millions of Chinese from poverty. That has been no small contributor to the UN’s ability a few years ago to declare that for the first time in human history, the rate of global poverty has gone into decline.

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China’s own per capita income has increased by a spectacular 3,427 per cent since 1980, from $171 to today’s $6,807. (All figures in U.S. dollars)

No spectacle of this magnitude is without its skeptics, though.

This week, the New York-based Conference Board, whose membership includes 2,500 of the world’s blue-chip companies, popped up as a doomster and scold.

It predicts a sharp decline in China’s previous torrid GDP growth rate to a “mere” 5.5 per cent between 2015 and 2019, and a still more modest rate of 3.9 per cent in the five years thereafter. (U.S. and Canadian annual GDP growth is forecast at just 2.5 per cent over the next two decades.)

“China is in a long, slow fall in economic growth,” the Conference Board warns. Then came the admonishment that “the state is too present in the market,” in the words of David Hoffman, managing director of the Conference Board’s China centre.

The report was widely reported, no more gleefully than by the right-wing Wall Street Journal. The Chinese economic miracle is anathema to libertarians at the Journal and elsewhere. It has been fostered by what economist call a “command economy,” in which the state, not the private sector, allocates capital and directs growth.

Actually, that is the very means by which postwar Japan pulled off its economic miracle. One example: Tokyo assigned export markets to Toyota Motor Corp. and mightily discouraging upstart Honda Motor Co. Ltd. from its desire to focus almost entirely on exports. (Honda ultimately prevailed.)

The U.K. Economist directed its fire earlier this month at the massive debt accumulating on the balance sheets of China’s mostly state-owned banks and industrial enterprises. The cost has been accumulated debt equal to some 250 per cent of GDP. (The equivalent number for Canada is about 33 per cent.)

For good measure, the Economist added that China’s looming debt woes will threaten to “zombify” the country’s economy. “Zombie company” is the term for beleaguered enterprises that should have gone bust ages ago, but are kept alive by banks unwilling to write off bad debt or governments loathe to lose an employer.

Missing in these scarems is mention of a second generation of Beijing reforms, including a crackdown on cronyism and forfeiting competitive advantage by allowing an undervalued Chinese currency to rise. Absent those crutches, Chinese enterprises will be forced to become more efficient. That argues against the productivity declines warned of by both the Economist and the Conference Board.

Recall that in the three decades ended 2011, China posted astonishing average annual economic growth of 10.2 per cent, a record that might be unmatched in history. But trees don’t grow to the sky, and that kind of growth ultimately must be curbed or ruinous inflation sets in.

So, Beijing has been deliberately slowing China’s economic growth for years now. It has been directing the major Chinese banks to curb lending it deems excessive, to avoid the boom-bust character of the earlier Industrial Revolution in Western countries — a debilitating phenomenon the West has yet to cure itself, as evidenced by the dot-com bust and the catastrophic U.S. housing bubble of the 2000s.

As for the supposed looming Chinese credit crisis, the Chinese owe this money to each other, not outsiders. And as the world’s top creditor country, China has $2 trillion in U.S. Treasury bills alone to bail out banks and companies that hit the wall.

As important, Beijing is encouraging a transition from an export to a consumer economy. China would then benefit, as does the U.S. — the world’s biggest consumer economy — from the stability of Chinese buying and selling among themselves, rather than relying heavily on volatile export markets.

Problems China has, in abundance.

The country’s social-safety net is rudimentary. And its per capita income, at $6,807, still trails that of a few other rapidly developing economies, notably South Korea, at $25,997. (Canada’s per capital GDP is $51,958.)

China endures an estimated 800 riots and other social disruptions each day. Most of these are industrial grievances among workers who have been laid off, usually temporarily.

The other outbreaks of social unrest are mostly ethnic disputes. Tibet is just one of many continual clashes between the majority Han Chinese population and pockets of other ethnicities that Beijing means to subjugate, an impulse that finds no sympathy here.

In a little-noted report, the International Monetary Fund (IMF) has just said that, by its calculations, China has already overtaken the U.S. as the world’s largest economy.

By conventional measures, the U.S. economy, at almost $16.8 trillion last year, is almost twice the size of China’s GDP, at $9.2 trillion. But adjusting for China’s much lower cost of living, China by the end of this year will account for 16.48 per cent of the world’s purchasing power, or $17.6 trillion, compared with 16.28 per cent for the U.S. ($17.4 trillion).

Given the immensity of the enterprise they are shaping — one-fifth of the world’s population — the surprise isn’t the occasional setback in China’s remarkable transformation, but how well China’s economic planners are doing in guiding China to a sustainably prosperous future.

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